The decision by the British government to expel an Israeli diplomat from London in connection with the recent murder in Dubai of a member of the Palestine resistance organisation Hamas takes the affair to a new level.

It has been widely assumed that the Mossad, the Israeli intelligence organisation, carried out the murder. The Israeli government has not denied it, nor, of course, confirmed it. The Mossad has carried out similar murders and attempted murders of people regarded as terrorists in the past. If there was any doubt, it was perhaps because the operation seems to have been clumsily executed, with the Dubai police well on top of the case. But this would not be surprising in itself. Although such operations have sometimes been carried out with superb efficiency (leaving aside any moral, legal or political objections for the moment), other Mossad and Israeli military intelligence operations have been botched – indeed, several have been fiascos.

Every government has the right to expel diplomats, without giving reasons. The conventional language about "activities incompatible with diplomatic status" is usually taken to mean espionage, and may do so. But not necessarily; when we expelled Libyan diplomats from London in the 80s (on my watch, in the Foreign and Commonwealth Office), it had nothing to do with espionage. As a rule, expulsions are usually followed by counter-expulsions – if only to reassure domestic opinion that the government has the moral high ground. It will be interesting to see whether the Israeli government follows that script.

What may be more important, however, is the broader political implications for Israel's relations with Britain, Europe and the international community. For some time, our policy-makers have faced a dilemma. It has become increasingly clear that the present Israeli government is not interested in the "peace process" and prefers to stonewall. The practice of announcing settlement-building activity, regarded by the international community as illegal and subversive of any peace process, to coincide with every visit of an American VIP to Israel is an illustration of this. After such an announcement on the day that Vice-president Joe Biden arrived in Israel a few days ago the secretary of state, Hillary Clinton, described it as an insult, which it was.

But that did not solve the problem: what do we do next? There are, indeed, options. US financial aid to Israel runs at around $3bn a year, and Israel's military dominance of the Middle East region depends on America. But the options are extremely unattractive in terms of American politics. When the Israeli prime minister calls on President Barack Obama, that aspect of the relationship will probably not be mentioned even in private, and certainly not in public.

As a trading nation, Israel is heavily dependent on its relations with the European Union. In Europe, we have become accustomed to saying that only America can influence Israel. It's a comfortable position, but only if it is credible. Here, too, there are serious political difficulties about any action against Israel. When David Miliband commented in December on the row about the possible arrest on war crimes charges of Israeli politicians visiting Britain, he went so far as to describe Israel as our "strategic partner". I wondered at the time what he meant, and whether the FCO has a list of countries that are strategic partners and others that are not.

The Americans, along with us and the rest of the quartet (the UN, USA, EU and Russia), can and do produce words that describe a balanced position on the Arab/Israel issue, and we did so at a quartet meeting in Moscow on 19 March. But words are not enough.

The leading Saudi English-language newspaper, the Arab News, described that meeting as spectacularly pointless, adding that Israel needs to believe there will be consequences if it continues to flout international law and ignore any UN condemnatory resolution that does not suit it. Others have called on Saudi Arabia to withdraw the Arab peace proposal – which we have all welcomed but never tried to build on.

It is in this context that the expulsion of an Israeli diplomat has to be seen. David Miliband has also announced that he will amend the travel advice to British citizens visiting Israel. This may not mean much in itself, but like recent European action to insist on accurate labelling of produce from Israel and settlements in the occupied territories, it is action, not words.

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